The public banking debate, Part 1
The American middle class and democracy: going, going…
By Mike Krauss
Bucks County Courier Times
The American middle class and the democracy it supported are going down faster than the Hindenburg.
With every passing day the United States looks more like the old Europe of aristocratic privilege which the first Americans cast off.
That’s the conclusion of university researchers and think tanks now getting their fifteen minutes in the news; and one scholar, Thomas Piketty, whose book “Capital in the Twenty-first Century” seems to have awakened even some American politicians.
But I doubt the readers of this column need any Ivy League experts to awaken them to the reality they experience every day and can see with their own eyes.
Since the Reagan years, the income and wealth of the nation have been steadily and grotesquely concentrated in ever fewer hands.
Unions were once a force for the middle class. But ‘free trade” sent the jobs off shore to fatten the wallets of the one percent and corporate CEOs, while the real wages of workers have not kept pace with the cost of living.
The political parties that were once broadly representative agents of our democracy have been reduced to irrelevance. They no longer control election financing, and those elected toe the corporate line; kept in line by a system of legalized bribes and post-Washington rewards.
Wall Street and the corporate elite own the federal government. The Supreme Court has locked in their domination with the most far reaching excess of any court in American history, declaring that corporations – created in the law by the people – have the same rights as the people whose law created them, and can spend at will to buy elections.
The betting now is that Jeb Bush and Hilary Clinton have the inside track to the White House. Americans talk of “dynasty” as if this were the seventeenth century of aristocratic privilege.
Because it is. The forward drive of the American people has been reversed. The dynasty that will continue to occupy the White House will be the Wall Street Dynasty.
As Piketty put it, “The [American] egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.”
Is there any hope for an American government of the people, by the people and for the people? I believe there is, but it will not be found in Washington.
The key to a real and lasting American recovery is jobs: good paying jobs that produce broadly shared prosperity. Only this will reverse the collapse of the American middle class into an historical anomaly - that brief time in history between the Second World War and until the rise of the one percent that began with Reagan tax policies, a time when the American middle class was the wonder of the modern world.
But neither the administration, Federal Reserve, Congress, Clinton II or Bush III will propose what it will take to fund a national policy to put America back to work on a scale and with the wages which alone can provide relief and hope for the middle class.
Where will the money and initiative come from to put America bank to work? From the American people. We are sitting on trillions.
The money can be found in something called the Consolidated Annual Financial Report (CAFR) which most governments are required to produce, but never publicize. It sits in pension funds and an astounding array of other agency and authority investments, rolling over from year to year, making money for fund managers and campaign contributions for politicians, but producing often inadequate and sometimes negligible returns for the people whose money it is.
The Controller of New York City reports $150 billion in city pension funds, and by one estimate the city holds $150 billion more in other “agency” investments - a third of a trillion dollars. The 2013 CAFR for Philadelphia shows more than $11 billion in investments. The Commonwealth of Pennsylvania is similarly endowed.
In my next column: how the American people can bypass Washington, invest in their own communities, restore middle class prosperity and take back the American democracy .
Mike Krauss is a former officer of Pennsylvania county and state government, an international logistics executive, chair of the Pennsylvania Project and a founding director of the Public Banking Institute. www.publicbankingpa.org
The public banking debate, Part 2
Banking for Main Street
In the wake of the 2008 failure of Wall Street, American middle class prosperity collapsed and along with it state and municipal tax revenue. Legislators and local officials responded with the tools they had to balance budgets: cutbacks, layoffs, more taxes and more debt.
In Pennsylvania, the governor and legislators settled on “austerity” and the promise of fracking: cut spending and in a few years all will be well. It didn’t work out that way. Three years on, and Pennsylvania faces a $1.2 billion deficit.
What happened is that you cannot grow an economy by shrinking the amount of money and credit in circulation. To the contrary, and the “falling” unemployment statistics are propaganda, bogus numbers manufactured by not counting the all time high percentage of Americans who have given up looking for work – young and old alike – because there are not enough jobs.
Here are two statistics you can trust.
CNN Money reports there were 1.2 million homeless American school children during the 2011-12 academic year, “up 10% from last year and 72% from the start of the recession.”
Wilkes Barre area newspapers report that 40 percent of the children in Pennsylvania’s Lycoming Valley live in poverty.
Because of this reality, state and local revenues remain insufficient to balance the budget and Pennsylvania public education, safety and health – already crippled – will take another hit.
It is much the same across the nation, except for one state, North Dakota, where the 2008 crash went unnoticed. Banks kept lending, no bank failed or needed to be bailed out, the economy kept growing, unemployment reached a record low of 2.6 percent, the state went on posting budget surpluses.
The middle class is alive and well in North Dakota. So it’s worth asking, what has North Dakota got that Pennsylvania and the rest of the nation do not?
The people of North Dakota own a bank, the public Bank of North Dakota (BND).
For more than a decade the BND has generated almost $400 million in profits for the state general fund. Last year it posted record profits of $94 million.
This public bank has a current commercial loan portfolio of more than $3.2 billion invested is that state’s economy, supporting small businesses, infrastructure, affordable student loans, disaster relief and more. With the BND as a partner, North Dakota banks offer loans with a 1 percent interest rate for the first five years of the term.
This generates jobs, economic activity and tax revenue.
Especially important for taxpayers, the public bank provides a lower cost alternative to the bond issues that drive municipal debt service costs and the higher taxes to pay them. Not only can a public bank lower these interest costs, any interest paid to the bank stays in the state or municipality that owns the bank.
Here in Bucks County, the debt owed on general obligation bonds for the county only, found in Note 13 to the most recent (2012) Consolidated Annual Financial Report (CAFR) shows total debt (principal and interest) of $330.2 million, of which $79.5 million is interest: 24 percent.
The 2013 CAFR has not been released, but as reported in this newspaper, county debt service costs in the annual budget for 2014 were increased 17 percent over 2013. Take a bite out of that, and taxpayers get relief.
As important, pubic banks strengthen the vital local lending market, by partnering with local financial institutions to make larger loans than otherwise possible, “buying down” the interest rates, providing liquidity, assisting to collateralize municipal deposits and offering “bankers’ bank” products. With a public bank as a partner, community banks can take back market share from Wall Street, as happened in North Dakota.
Why do community banks matter? Here’s one reason. Throughout the never ending Great Recession, the states with the most number of community banks have had the lowest foreclosure rate (North Dakota was the lowest), and the states with the fewest community banks have had the highest foreclosure rate.
But our community banks are under siege, their numbers down nationwide from about 7,600 in 2008 to 6,200 today.
Budget cuts, layoffs, more debt and more taxes – the American version of the failed European austerity – cannot build prosperity. The builders need a new tool.
An American network of state public banks, working in concert with county and municipal public banks to grow local economies and the local banking industry can create a path back to sustained prosperity for the American people, and help rebuild a strong middle class, the backbone of every modern democracy.
In my next column: the ABCs of public banking.
The public banking debate, Part 3
The ABCs of public banking
Public banks are capitalized with public funds and can hold state and municipal deposits safely away from the gamblers on Wall Street.
As with any bank, these funds are leveraged, but work in partnership with the local banking industry to meet the needs of communities they serve for affordable credit — to grow local economies, create jobs and tax revenue, reduce debt and help insure sound public finances. Banking in the public interest.
This is the model developed with huge success by the Bank of North Dakota (BND). Across the nation, almost two dozen states and as many counties and municipalities are considering how best to establish similar public banks. Each faces similar challenges.
The first is to define mission. Generally, it’s all about generating affordable and sustainable credit to support locally directed economic development. But, where to direct that credit and the bank’s profits, which belong to the only shareholder, the people?
This depends on the needs of the people of the chartering government entity and varies from place to place, but here is a sample of what some communities are considering:
Provide mortgages and financing to reclaim the vacant buildings and properties that blight many neighborhoods, for homes or businesses. Support small businesses job creation. Refinance underwater mortgages. Consolidate student loans at lower interest. Reduce public debt. Finance community health centers. Support existing development agencies and infrastructure investment. Direct profits to schools and public safety.
The second challenge is capitalization. The Bank of North Dakota was started with a bond issue. Because the bank pays off its own bonds (self liquidating) that is an option. But this will depress profits in the early years of operation.
The option gaining the most traction is to examine existing public investments, identify those that are under-performing and replace them with an equity position in the bank. Prudent portfolio management.
The public Bank of North Dakota (BND) has consistently returned 17 to 25 percent on equity. I know of no municipal, state or pension fund investment that comes close. And some municipal investments are just dumb.
For example, Philadelphia and Pennsylvania both report in their Consolidated Annual Financial Reports (CAFR) major investments in foreign instruments — a staggering $1 billion in Philly. Not only is that money not invested in the city or state, it’s not even invested in America.
Moreover, few of these investments, whatever the return, can demonstrate any reinvestment in or tangible benefit for the communities whose money it is.
The third issue is governance. It is vital that, as in North Dakota, bankers run the bank and not politicians. Most adult Pennsylvanians will know what I am talking about.
Certainly, elected officials responsible for public funds must be able to remove a public bank CEO for cause. But staffing and management must be left to a CEO and directors with demonstrable banking experience, insulated from political manipulation and patronage hiring.
The forth issue is accountability. Elected officials must be able to insure the defined mission of the bank is fulfilled, which they may modify from time to time, and that the bank meets performance targets, or the CEO goes.
Fifth is transparency, which is vital for accountability. But a public bank is both subject to regulation and audit by state banking examiners, and is publicly audited by an elected (in Pennsylvania) controller, also accountable to the people.
Then there is risk management, which is enhanced by public banks. Because loans are originated by a commercial lender which must first approve the risk, and only then offered to the public bank for participation, which must conduct its own, independent risk assessment, the risk of default is substantially reduced. The highly profitable BND has one of the lowest default ratios in the nation.
There are other policy and management issues which must be addressed in any business plan and would be familiar to any banker, such as policies for capital, deposits, lending, profit analysis, interest rate risk and managing the bank’s investments.
In proposing public banks, the Public Banking Institute and Pennsylvania Project approach state lawmakers, city council members, mayors, county commissioners and those who have charge of public funds as if they were being asked to invest in a start-up, which in effect they are, and these officials must proceed with due diligence.
But this is not rocket science. It is the sound banking with which our community bankers are familiar, but was abandoned by Wall Street.
Advocates for Pennsylvania public banks are not proposing to re-invent the wheel — just to roll it down to our commonwealth from North Dakota.